Tuesday, May 28, 2013

The Federal Circuit has set the stage for granting Apple an injunction against Samsung

A week ago the United States Court of Appeals for the Federal Circuit issued its opinion in a snowplow patent case, Douglas Dynamics, LLC v. Buyers Products Company, and (among other things) instructed the district court to grant a permanent injunction it previously denied. The majority of the three-judge panel that decided in favor of an injunction includes current Chief Judge Rader, who personally wrote the per curiam opinion, and Circuit Judge Newman; Senior Circuit Judge Mayer (who preceded Chief Judge Rader's predecessor) dissented and took a Judge Koh-like injunction-skeptical perspective. The per curiam opinion on the issue of injunctive relief indicates that Apple is reasonably likely to win from this appeals court the permanent injunction Judge Koh denied in December. There are amazingly striking parallels between the reasoning of the district court that denied Douglas Dynamics an injunction and various positions taken by Judge Lucy Koh in Apple v. Samsung, and -- more importantly -- between Apple's appellate argument and the Federal Circuit's Douglas Dynamics opinion, except that no one in Douglas Dynamics (not even the dissenting opinion!) makes reference to the controversial "causal nexus" requirement, which also bodes extremely well for Apple.

Earlier this month the Federal Circuit affirmed a permanent patent injunction in Versata v. SAP. Some of the court's reasoning showed that software patent injunctions are still available in the United States, but the Versata ruling is considerably less useful to Apple because, among other things, the court believed that Versata's relevant patent was central to an add-on product that SAP sells for hundreds of thousands of dollars per installation. Apple doesn't sell rubber-banding or pinch-to-zoom separately -- those are typical cases of "it's a feature, not a product". While there was a similar reasoning in Versata, the "causal nexus" term didn't appear in that Federal Circuit opinion either, which again supports Apple's claim that it was held to a higher standard than other patent holders. To the extent that Samsung was able to cite to cases mentioning a "causal nexus" requirement, those weren't patent cases, which also says something.

If Judge Koh had to rule on Apple's post-trial request for an injunction again and had to apply the Douglas Dynamics logic, she would have no other choice but to grant Apple a multi-patent permanent injunction against Samsung.

Apple highlights several aspects of the Douglas Dynamics ruling, but there's even more in it that supports Apple's case than what Apple's letter quotes (there's a page limit for such notices). I'll firstly summarize in bullet-point form the parts Apple emphasizes and then I'll talk about some others.

Just like Samsung argued that Apple's patents cover only minor feature of complex multi-feature products, Buyers Products had argued that (in the Federal Circuit's summary) the patents-in-suit "cover[ed] only some components of the accused [products]". Still, the appeals court determined that an injunction was appropriate, for a variety of reasons that also apply in the Apple-Samsung case. Presumably there's a much smaller number of patentable inventions in a snowplow than a smartphone, but today's snowplows are probably also quite advanced. The key thing is that patents and products aren't coextensive in either case.

"Irreparable injury encompasses different types of losses … including lost sales and erosion in reputation and brand distinction"

Apple's letter quotes a full paragraph that the Federal Circuit could simply copy and paste into its future Apple v. Samsung opinion because it describes the injustice that Apple, too, is currently suffering:

"Where two companies are in competition against one another, the patentee suffers the harm—often irreparable--of being forced to compete against products that incorporate and infringe its own patented inventions."

It's hard to think of a sentence that would better describe Apple's situation vis-à-vis Samsung.

Closely related to the previous item is the holding that "mere damages will not compensate for a competitor’s increasing share of the market, a market which [the patentee] competes in, and a market that [the patentee] has in part created with its investment in patented technology".

If you've read my previous commentary on this appeal (such as 1 and 2), then you know that one of the issues I care most about in connection with the Apple v. Samsung injunction appeal is what bearing workarounds should have, and whether they should favor entry or denial of an injunction. And I've said that I believe workarounds actually favor Apple's cause (with respect to the balance of hardships), even though Samsung makes far more noise about them. I'm in good company because this is what Chief Judge Rader wrote in Douglas Dynamics:

"If indeed Buyers had a non-infringing alternative which it could easily deliver to the market, then the balance of hardships would suggest that Buyers should halt infringement and pursue a lawful course of market conduct." (Apple's letter quotes the essential part of this, too.)

Apple notes that Douglas Dynamics stresses the public interest in intellectual property protection as opposed to a presumed interest in competing but infringing products (which someone on an AppleInsider forum once referred to as "copytition"). I'll quote all three sentences at the end of the Federal Circuit's public-interest analysis (Apple quoted key passages):

"While the general public certainly enjoys lower prices, cheap copies of patented inventions have the effect of inhibiting innovation and incentive. This detrimental effect, coupled with the public’s general interest in the judicial protection of property rights in inventive technology, outweighs any interest the public has in purchasing cheaper infringing products. In sum, the public has a greater interest in acquiring new technology through the protections provided by the Patent Act than it has in buying 'cheaper knock-offs.'"

If you're interested in further detail, just go to the bottom part of page 9 of the Douglas Dynamics opinion, which is where the injunctive-relief analysis begins. Near the bottom of the next page there's the following summary of some of the district court's reasons to deny an injunction:

"Although 'the parties here compete for sales of snowplow truck assemblies, along with a number of other manufacturers,' the district court found that Douglas suffered no injury because Douglas failed to show it was losing sales or market share to Buyers. The district court relied on evidence that persons willing to pay for a Douglas snowplow were unlikely to
purchase a Buyers snowplow as a substitute, and that Douglas's market share increased about 1% a year after Buyers introduced its infringing snowplows."

I don't know the snowplow market, but based on the Federal Circuit opinion I see that Apple actually has a much stronger case for irreparable harm based on its competitive situation with Samsung than Douglas Dynamics had with respect to Buyers Products. The smartphone market is pretty much a two-horse race, which doesn't seem to be the case for snowplows to that extent. And while "the district court likened Douglas's snowplow to a Mercedes Benz S550 and Buyers's snowplow to a Ford Taurus", Samsung's flagship products are to Apple what BMW, not Ford, is to Mercedes, except that BMW never copied Mercedes's designs. The Federal Circuit wasn't impressed with the Mercedes-Ford argument anyway:

"The Mercedes would lose some of its distinctiveness and market lure because competitors could contend that they had 'similar features' without noting that those features infringe Mercedes's proprietary technologies."

(emphasis mine)

I've said all along that what Apple wants is distinctiveness, and you can only be distinctive if you can, if necessary, obtain injunctions to prevent someone from copying you.

Here's something Chief Judge Rader said about a patent holder's continued success despite infringement not serving as an indication of there being no irreparable harm:

"Stated differently, even with a Ford Taurus announcing that it possessed similar features on the market, Mercedes could maintain or increase its market share for a variety of reasons."

Even though Judge Koh's order denying a permanent injunction concedes some of this, the key question is what the appropriate consequence should be. Judge Koh, relying on an extremely demanding application of the outlier "causal nexus" requirement, concluded that Apple wasn't entitled to an injunction. Chief Judge Rader, however, granted Douglas Dynamics an injunction.

What's particularly good for Apple with a view to design patents and trade dress, the Federal Circuit also does away with the notion that consumer confusion must be shown:

"The district court also made a clear error of judgment in its analysis of Douglas's reputation loss. The district
court found that Douglas had a reputation as an innovator, yet determined there was no injury because there was
no evidence that interested consumers confused the two companies. Even absent consumer confusion, however, there can still be harm to a company’s reputation, particularly its perception in the marketplace by customers, dealers, and distributors. As just one example, Douglas's reputation as an innovator will certainly be damaged if customers found the same 'innovations' appearing in
competitors' snowplows, particularly products considered less prestigious and innovative."

Apart from the last seven words -- the "particularly" part -- you could simply replace "Douglas" with "Apple". By now, Samsung's products aren't "less prestigious", but most consumers still know that Apple, not Samsung, revolutionized the mobile phone business.

Besides the absence of references to a "causal nexus" (which -- I repeat myself -- is also good for Apple because it shows that the "causal nexus" requirement is still a non-mainstream theory in patent infringement cases), there's another major difference between the cases: in Douglas Dynamics, "the evidence shows that Douglas had never licensed the infringed patents, and intentionally chose not to, so that it could maintain market exclusivity". Apple, however, has licensed at least some of the patents-in-suit (though definitely not the relevant design patents) to IBM (which doesn't make smartphones), Nokia, and HTC (which, however, had to agree to an "anti-cloning" provision). But those license deals have very different effects from a de facto compulsory license resulting from the denial of an injunction against Samsung, as my favorite three sentences in Apple's reply brief stress:

"The question is not whether Apple could be adequately compensated by a narrow, voluntary license to a non-competitor. Instead, the court must ask whether an unrestricted compulsory license to Apple's primary direct competitor is an adequate remedy. The answer to that question is clearly no."

In addition to differences of major commercial significance between the deals Apple struck and the "deal" Samsung wants from the courts, I also believe Apple can overcome the licensing issue for policy reasons: the Federal Circuit won't want to disincentivize settlements and license deals. It wouldn't make sense to apply the eBay injunction factors in such a way that a company has to categorically withhold licenses.

Finally, here's another thing Chief Judge Rader wrote in Douglas Dynamics that could be applied to the Samsung case (replace "Douglas" with "Apple" and "Buyers" with "Samsung"):

"More relevant is the rise in Buyers's market share from zero to about 5% in three years while infringing Douglas's patents. This record evidence underscores the profitability of infringement and suggests that mere damages will not compensate for a competitor's increasing share of the market, a market which Douglas competes in, and a market that Douglas has in part created with its investment in patented technology."

Douglas Dynamics is an enormous boost for Apple's aspirations to win an injunction against Samsung, not only over the multiplicity of intellectual property rights a federal jury found infringed last summer but also with a view to next year's trial over other (generally more impactful) patents, where Apple may very well obtain additional infringement findings based on recent claim construction results. And it's not just about the patents Apple asserts in court. The availability of injunctive relief is going to have a major impact on the terms of the settlement that Apple and Samsung will for sure reach at some point, though no one knows when. Judge Koh always urged them to settle, but if she had adjudged Apple's injunction request differently, we might already have seen a settlement. Now it's up to the Federal Circuit, whose Chief Judge has just taken a number of positions that are fantastic for Apple's strategic purposes.

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About Me

Florian Mueller is a former award-winning intellectual property activist with 25 years of software industry expertise spanning across different market segments (games, education, productivity and infrastructure software), diverse business models and a variety of technical and commercial areas of responsibility. In recent years, Florian advised a diversity of clients on the patent wars surrounding mobile devices, and on their economic and technical implications. (In order to avoid conflicts of interest, Florian does not hold or initiate transactions in any technology stocks or derivatives thereof.) He is now developing a game app for smartphones and tablet computers.